Operational Business Risk Defined
Operational business risks are failures related to day-to-day operations that can impede a company’s ability to earn revenue. Often operational business risks are the result of insufficient or failed processes. An example of a few operational business risks might be:
- A clogged toilet in your restaurant necessitates that the business closes until it gets it fixed.
- Your web hosting company goes offline for several hours making access to your company’s e-commerce site unavailable, thereby causing you to lose sales.
- The flu epidemic hits your business, resulting in high absenteeism and causes the company to miss a deadline.
Operational business risk can be broken down into six types of risks.
Strategic risk is where a business has risk associated with taking on or changing the businesses strategy direction. Strategic risk involves the owner weighing the pros and cons of taking the business in a new direction. Here are three common examples of strategic risk.
- You have a successful business in one part of town. You are thinking about opening a second location across town to grow your business. Will this new location add to your already successful business or cause you to fail?
- You have outgrown your current physical space requirements. You are considering signing a new lease on a much larger space which is a little bit larger than your current space requirement today but may serve for growth in the future. Will moving to a much larger space increase your operational capacity or will the increased rent cause more financial risk
- You spot a product that you think will sell well in your store. You agree to buy the product in bulk, lowering your per-product cost and providing you with more margin. Will the product sell as fast as you projected or will you have to heavily discount it just to get a portion of your invested money back?
Reputation risk is where the company’s reputation is tarnished as a result of an incident perceived as being dishonest, disrespectful or incompetent. Reputation risk is generally associated with a serious loss of trust or confidence in your business.
Here are three common examples of reputation risk.
- An employee has their laptop stolen that contains sensitive client information.
- A customer has a bad experience with your business. Rather than addressing the customer’s issue, the owner defends the company’s actions and the customer leaves a negative review about your establishment that goes viral.
- An employee is overheard speaking ill about a client. An employee of the client firm takes out their phone and records the discussion. A few days later, the company and the owner are hit with a lawsuit claiming slander.
Quality risk is where you fail to meet the quality goals of your products, services and/or business practices. You don’t need to be the manufacturer of the goods or the person delivering a service to be affected by quality risk.
If you sell a product that does not meet the customers; quality expectations, the customer will hold the retail business accountable for any injury or damages.
Moreover, your business may use a subcontractor whose potion of the project fails to meet the customers’ expectations. The customer will not hold the subcontractor accountable, but instead hold your business responsible.
Resource risk is where a lack of resources, including both human and financial, can cause a business to fail to meet its objectives.
For example, your customer says that your video production company did a great job on a recent promotional video. Now they what you to handle all of their video production needs. Can you find enough videographers and video editors to support this new work? Do you have the financial resources available to purchase the necessary new equipment to support the increased workload?